Taxes v Tourism: A battle for the Bahamas airports

When it comes to growing a tourism-based economy air travel is a critical component. When you’re a tourism-based island nation the airlift need is even more pronounced. For the islands of the Bahamas these two departments – aviation and tourism – are managed together, owing two their intrinsic dependencies. And the country is facing a massive challenge on both the aviation and tourism front.

The Bahamas must modernize air traffic infrastructure and the small country is struggling to come up with plans to pay for the necessary work. The country operates 28 airports, 16 of which offer international arrivals and departures. The terminal at Lynden Pindling International Airport (NAS/MYNN) in the capital of Nassau is relatively well-suited to the traffic it sees the out-islands struggle mightily. It is on those islands that the massive costs are borne.

Speaking at the third annual Caribbean Aviation Festival hosted in Paradise Island earlier this month The Honorable Dionisio D’Aguilar, Minister of Tourism and Aviation of the Bahamas, addressed these concerns:

There is just no way the budget of country as small as the Bahamas can upgrade or transform these airports to accommodate what is happening in tourism. We’ve got three major family islands airports – Abacos, Exuma and North Eluthera – and the government is spending $35-40mm on each one and it is unsustainable. The only way that we see that we can bring a quality airport to these small islands is to build a business model, go to the private sector and say to them, ‘How can you help us?’

Building that business model is the main point of contention, particularly as it centers around adding a passenger facility charge (PFC) for departing passengers. The PFCs can fund airport operations but they also adversely affect airlines flying into a market. Vincent Vanderpool-Wallace, former Minister of Tourism of the Bahamas and former CEO of the Caribbean Tourism Organisation, also spoke at the conference, reminding the gathered representatives of governments, airlines and tourism boards of the price-elasticity consumers bring to the table when choosing a destination. Total cost of the trip matters far more than who gets which chunk of the money. Increasing the taxes (i.e. PFCs) too much means airfares must increase to compensate. And when the fares rise too high travelers simply choose another destination.

The $38 PFC for departing Nassau is significant but covers the costs of the airport operations. Could similar hikes succeed in the Family Island airports?

Nassau airport, the success story D’Aguilar cites, carries a $38 PFC today. This is a model that D’Aguilar believes is “working very well.” And he is quick to point out that the Bahamian government bears none of the costs for the operation; the airport is fully funded by PFCs. But the airport also has significant competition among multiple airlines, keeping fares relatively in check. The family island airports see fewer flights and more limited options. They also see higher fares. Bringing an additional charge in the form of PFCs could tip the scales, stunting the growth that has proven spectacularly positive in recent years.

We need to invest in our [family island] airport infrastructure… The model we’ve used at LPIA, using a private sector partner, is working very well. We have a quality product and it is not costing the treasury one dollar. One might argue that it is expensive but it has to be self-sustaining and airports are expensive things to run. And expensive things to build. That’s the challenge. And the fact that we’re an island nation compounds the issue. …

Obviously we don’t want a PFC that chokes tourism arrivals but we need a new airport. It is just unsustainable for the government to go out and borrow the money to build these airports anymore. We’ve got too many to build and it is too much money to spend.

Ultimately it becomes a battle of infrastructure spending and building the correct cash flow mechanisms. The government could, for example, create a hotel tax that generates the same revenue as the PFCs and earmark it for airport construction and maintenance. That would still fall on the shoulders of visitors, of course, but also not hit the locals as hard. It would also allow the government to maintain full control of the airports rather than ceding the funds to a private company that will manage the facilities. But that’s still an extra tax that passes on to visitors. “Hiding” it in the hotel rates rather than the airfare does not change the underlying problem. Vanderpool-Wallace believes that the growing tourism economy on its own should be robust enough to drive the national economic engine without additional tourism taxes. It is unclear that the revenue growth pace can track the costs of airport construction and maintenance.

On a global scale

Privatization of airports also raises red flags with IATA, the global airline trade group. At the recent IATA Annual General Meeting in Sydney the group urged caution, highlighting increased costs and lack of promised efficiencies.

We are in an infrastructure crisis. Cash-strapped governments are looking to the private sector to help develop much needed airport capacity. But it is wrong to assume that the private sector has all the answers. Airlines have not yet experienced an airport privatization that has fully lived up to its promised benefits over the long term. Airports are critical infrastructure. It is important that governments take a long-term view focusing on solutions that will deliver the best economic and social benefits. Selling airport assets for a short-term cash injection to the treasury is a mistake. – Alexandre de Juniac, IATA’s Director General and CEO

Airports are expensive. So are roads. And ports. And other infrastructure projects. Singling aviation out to bear that cost burden outside of the government umbrella is an all too common policy around the globe. The Bahamas currently do not plan to fully privatize the family island airports but caution is required. Pushing too much to private industry could irrevocably destroy the investment governments previously made to build the tourism industry. In a country like the Bahamas, where tourism is the economy, that is a fine line to walk.

More from CaribAvia 2018

About Seth Miller

Seth Miller has over a decade of experience covering the airline industry. With a strong focus on passenger experience, Seth also has deep knowledge of inflight connectivity and loyalty programs. He is widely respected as an unbiased commentator on the aviation industry.

He is frequently consulted on innovations in passenger experience by airlines and technology providers.